- $1,000, 100 per cent invested in stocks now = $7,554. A return of 7.2 per cent a year.
- $1,000, 100 per cent invested in government bonds now = $5,806. An annual return of 6.2 per cent.
- $1,000, 60 per cent invested in stocks, 40 per cent in government bonds now = $8,091. An annual return of 7.5 per cent.
How a 60/40 strategy could have provided better and smoother returns
Rebalancing: The secret to making the 60/40 rule workTo make the strategy work investors need to tweak their portfolio at least once a year, to ensure it retains its roughly 60/40 split. This action is known in investment circles as rebalancing. In practical terms, it involves selling some outperforming assets and re-investing the proceeds in the underperforming ones, so that the mix of stocks and bonds remains 60/40. You need to do this because, for instance, if stocks have a good year and bonds have a bad one, equities could end up representing a far bigger percentage of your portfolio than 60 per cent. Left alone, you could unwittingly end up with a portfolio heavily weighted towards one asset. And that leaves you exposed to greater risk.
In this example, by selling outperforming stocks and buying underperforming bonds, the portfolio would again be balanced. In an ideal world, the underperforming assets would then begin to perform better, enhancing the total portfolio return, while also smoothing out volatility (extreme high and lows price moves). Read more: